Nike (NKE) is the dominant player in the athletic apparel and footwear industry. Its market cap of $68.65 billion is more than three times the size of its rival, Adidas (XTER:ADS, ADDYY), at $20.77 billion. Nike is also more efficiently run with a return on equity of 22.28 percent and net operating margin of 12.86 percent compared to Adidas’ return on equity of 14.36 percent and operating margin of 8.29 percent.
The reason I think Nike is overvalued is because of the stock’s huge run over the past five years, and its price has gotten ahead of its earnings. Over the past five years the stock has more than tripled. Overall it had a 206 percent gain equating to a gain of 25 percent per year. At the same time, earnings per share have grown at 11.3 percent per year. In the long run, a stock’s price tends to correlate with its earnings.
Nike’s fiscal year ended in May, and the full year results were just released on June 26. The full year earnings were reported as $2.97 per share, a 9.6 percent increase over 2013’s earnings of $2.71. The company’s goal is to grow earnings in the mid-teens, and the average analyst is estimating a growth in earnings per share of 15 percent per year over the next couple of years. Adjusting the GuruFocus DCF Calculator to include a 15 percent growth rate results in a fair value of $60.77. The stock closed at $78.69 per share today, 7/9/2014. The P/E of Nike is currently at 26.82, higher than its median P/E of 19.7 for the past ten years and 21.6 for the past five years. If priced at its 10-year median P/E, Nike would be trading at $58.80 per share and $64.60 if trading at its 5-year median P/E.
When looking at Nike’s numbers for Profitability & Growth, they are almost as good as it gets with a score of 9/10. In the long run Nike will likely provide above average returns, but at its current valuation, it will take about two years for its earnings to catch up with its stock price. As seen below, all but one of Nike’s valuation ratios are historically overpriced.
So far this year, the gurus have been buying Nike. There have been five buys and one sell for the first for the first quarter of 2014. There are currently 14 gurus we follow that are holding the stock. Frank Sands has the largest position at nearly 16 million shares, representing about 1.8 percent of the shares outstanding. The gurus will be filing their 13Fs with SEC over the next five weeks. That will provide us with an updated view of how the gurus are managing their Nike holdings.